The Constitutional Court has begun a hearing into whether the EU bailout scheme and budget rules are compatible with German law.

"A considerable postponement of the ESM (the European Stability Mechanism bailout fund) which was foreseen for July this year could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the euro zone's ability to make necessary decisions in an appropriate timeframe," Mr Schaeuble said.

"Doubts in the constitutional possibility or the readiness of Germany to stem dangers for the financial stability of the euro zone could lead to the current crisis symptoms being exacerbated considerably," he said.

"Some member states of the euro zone would end up having further big problems financing themselves, which could raise questions over the stability of the euro zone as a whole."

Mr Schaeuble was addressing a hearing of the court which is examining complaints lodged by academics, lawmakers and ordinary citizens against the ESM and new budget rules which they say undermine German democracy.

"In politics, unusual situations and crises often require unusual measures," the head of the Constitutional Court, Andreas Vosskuhle, said at the start of the hearing.

Shares in major world markets rose today on optimism that the court will approve the fund

German central bank chief Jens Weidmann is also expected to address the hearing as well as plaintiffs including academics, rebels from Angela Merkel's own coalition and the hardline Left, and members of the public.

But despite pressure on Germany to complete its ratification of the ESM, which is already delayed and cannot come into effect without the biggest economy in the euro zone, Mr Vosskuhle said the court would not give a ruling today, but would weigh up whether to delay the laws until it has made its decision.

The government argues that these tools for tackling the debt crisis were given legitimacy by parliament's approval in June.

"The judges have to realise that the banking and debt crisis in Europe has put us in a situation that forces politicians into borderline decisions," said Helmut Brandt, a legal expert from the ruling coalition, urging the court to decide in two weeks.

Anything longer would mean a serious delay in implementing the ESM, which has already been postponed from July 1st, and raise serious doubts about whether Europe will really get the extra firepower it needs to combat the crisis.

But protesters outside the court in the southwestern city of Karlsruhe argued that the bailout fund and fiscal pact ceded too much power to Brussels on core issues such as budgetary powers, which should remain the remit of the German parliament.

Candles flickered around a cardboard tombstone bedecked with flowers, with the epitaph: "Here rests in peace the constitution of the German republic, born on May 23 1949, died on 29th June 2012. The citizens mourn."

Not all the protesters were eurosceptics. Roman Huber, who represented 12,000 signatories to one complaint, said his "More Democracy" citizens' group wanted "to help determine the future of the European Union" but in full respect of democratic rules.

"We have the right to elect a Bundestag (lower house of parliament) which really has a say in central issues such as budget sovereignty," former German justice minister Herta Daeubler-Gmelin, from the centre-left Social Democrats (SPD), said outside the courthouse.

The red-robed judges in Karlsruhe have a reputation for being a stone in the shoe of European integration, especially after they held up the Lisbon Treaty updating the European Union's constitution in 2009 to defend the role of the German Bundestag (lower house).

The court has chided the chancellor's government repeatedly on this point since the sovereign debt crisis began more than two years ago, though it has never actually rejected any bailout itself - for Greece or other euro zone countries - as unlawful.

Mr Vosskuhle, who heads the eight-judge "senate" handling the ESM/fiscal pact case, has called this the "red line" running through all of the court's decisions on Europe.

After reports that Merkel is growing impatient with the court, Germany's head of state said on Sunday he supported the plaintiffs' rights to test euro crisis measures in court.

President Joachim Gauck - whose signature is needed to make ratification complete - made a rare incursion into the euro debate by saying he was "glad that this action is being taken".

The main opposition SPD leant its votes to the ESM and fiscal pact in return for growth and job measures. SPD chief Sigmar Gabriel believes they are "in tune with the constitution" but wants any further steps to integration put to a referendum - a view the court in Karlsruhe might also express.

"The constitution leaves us still some room to play," she told Der Spiegel online, noting that the preamble to the 1949 charter includes a commitment to a "united Europe serving peace in the world".

Dr Merkel favours greater fiscal and political union, provided Europe gets strong enough institutions to ensure that the errors that led to the sovereign debt crisis are avoided in future.

Mr Vosskuhle is an avowed fan of a "federal Europe" but wants to reach that goal in accordance with a constitution which has been defended by his court since 1951, in a system of checks and balances meant to prevent a return to Nazi-style tyranny.

A surprising number of Germans express support for ceding more sovereignty.

They are set for a showdown with an increasingly vocal band of eurosceptics in Dr Merkel's coalition and beyond, who are upset at what they see as concessions to Italy and Spain at the last EU summit on support for their banks and debt.